WILL POLITICS TRUMP FISCAL NEEDS?

Question of next prime minister still taxing issue

by Yumi Wijers-Hasegawa

Prime Minister Junichiro Koizumi succeeded in shrinking the political pork barrel by privatizing the powerful post office monopoly and weaning politicians from their heavy reliance on public works to boost the economy.

But he also postponed some crucial tasks, such as reforming the social security system and resolving the nation’s snowballing debt, which is now worth a combined 775 trillion yen, or 1.5 times Japan’s gross domestic product.

The first and foremost task for the next prime minister and his Cabinet is to swiftly solve those problems by raising the consumption tax.

However, since the candidates running to be the next prime minister have held very little debate on the topic, it is difficult to tell which of them will come up with the right policy to drag Japan out of its fiscal mess.

The front-runner, Chief Cabinet Secretary Shinzo Abe, is seen by economists as having doubtful credentials for formulating fiscal policy.

The next administration must admit that it cannot guarantee a social safety net will be in place to catch people in such a rapidly aging society, and urge them to find alternatives to protect themselves, said Hidehiko Fujii, chief senior economist at The Japan Research Institute.

According to an estimate by the Health and Welfare Ministry, social security costs, which stood at 89.8 trillion yen in fiscal 2006, are likely to grow to 105 trillion yen by fiscal 2011, 116 trillion yen by fiscal 2015 and 141 trillion yen by fiscal 2025.

The contradiction between the government’s rhetoric and the cold hard numbers means the public needs to have a discussion on social security reform, said Toshihiro Ihori, a professor of public economics at the University of Tokyo.

Ihori said that although the government won’t be able to afford the pension benefits promised to today’s young people, the Social Insurance Agency keeps saying that everything’s going to be OK.

“The next government must urgently carry out radical reform of the Social Insurance Agency, and make it produce a balance sheet for each individual to clarify who has paid how much for what kind of tradeoff,” he said.

This will make the elderly — the largest segment of beneficiaries — aware that they are getting much more than what they paid for, so the whole nation can enter a discussion on how to solve the shortfall that is facing younger generations of taxpayers, Ihori said.

This equation also applies to health care, he said.

According to the National Institute of Population and Social Security Research, 70.4 percent of the 84.27 trillion yen in social security benefits in fiscal 2003 was used by the elderly.

According to an estimate in the 2003 white paper on economy and public finance, people 60 years or older gain an average of 65 million yen in their lifetime through pension benefits and public investment. People under 20 years old, however, have burdens that surpass benefits by 52 million yen.

Many economists are dissatisfied because none of the candidates running for prime minister has clearly stated how he is going to solve these two looming problems.

Both Abe, the odds-on favorite, and candidate Taro Aso, the foreign minister, say that pump-priming measures and reductions in government expenditures should precede any tax hike.

Only the third candidate, Finance Minister Sadakazu Tanigaki, is clearly advocating a tax hike. Tanigaki, who has been involved in overseeing Japan’s financial and industrial revitalization, said the consumption tax should be raised to at least 10 percent before 2015 to cut the enormous 775 trillion yen deficit and avoid a national bankruptcy.

According to the Finance Ministry, a one-point hike in the consumption tax would bring in about 2.6 trillion yen in revenue.

“Tanigaki dared to say the necessary — that the consumption tax must be raised,” said Ihori. “Compared with the other candidates, what he says has the most substance.”

Takero Doi, an associate professor of economics at Keio University, said that the courage to carry out a tax hike will be crucial for the next prime minister.

He said doubling the rate to 10 percent from the current 5 percent is the minimum if Japan is plans to cover its social security shortfall.

“It’s an amount he can explain appropriately if asked,” Doi said.

Most politicians avoid tax hikes as if they were avian influenza.

“When the consumption tax was raised to 5 percent in April 1997, the economy stagnated and tax revenue fell. It would be stupid to do that again,” Aso said Aug. 25.

And during Abe’s first policy speech Friday, he also managed to duck the magic number.

“It is true that (the consumption tax) needs to be raised to a certain extent,” Abe said. “But it is not appropriate to say to which extent now.”

Doi said Abe is just being politically astute. After all, there is no point in mentioning something as unpopular as a tax hike when you’re facing an Upper House election next summer.

Still, Doi thinks there’s more at work than meets the eye.

“I also suspect the Finance Ministry asked Abe, behind the scenes, not to discuss it,” Doi said. “With Tanigaki advocating it loudly, the ministry is afraid Abe might start denying the hike as a counterplot against Tanigaki.”

Doi said he fears that if something politically negative hits Abe before the LDP election day on Sept. 20, he may resort to saying he won’t raise taxes as a tactic against Tanigaki.

“If that happens, it would be a total disaster for the Japanese people,” Doi said.

But economists disagree with Tanigaki’s position on making the consumption tax a special-purpose tax for covering only social security. If that happens, it might become too inflexible and be cut off from any other purpose.

Concerning the timing of a hike, however, Doi said that considering the financial climate, it must take place now. Realistically, it should happen around 2009, when the government’s contribution to the basic pension is raised to 50 percent from the current 30, he said.

Ihori said the pace is just as important as the timing.

“It should take place when the economy is good, and if possible, at a gradual pace of about 1 percent per year,” he said.

Judging from what they have said so far, Ihori believes both Abe and Aso might return to the old guard’s favorite economy-boosting trick — public works.

At the first policy debate held by the three candidates on Aug. 27 in Toyama, Abe said building infrastructure in rural areas is an investment for the future. Aso joined him and got a big round of applause by asking, “Are public works projects really that bad?”

Abe, who is liked for his charisma and tough diplomacy but doubted for his economic skills, signed up for private lessons on finance three years ago. However, he became so busy with North Korea and other pressing issues that he quit after just one session, a political insider said.

Doi of Keio University said that given his lack of experience in economic or fiscal policy, Abe understandably has no skill in the field. But that may not be such a setback.

“Once he becomes prime minister, he will be able to pick any brain with a solid financial basis,” he said.